Finally, some good news for AT&T Inc. (NYSE:T) shareholders. AT&T stock has managed to claw back after it hit its lowest levels in almost two years last month. Another dividend increase and some helpful industry news has boosted the sentiment toward T stock.
But it’s just not enough, or close. The stock price still is down almost 10% so far this year, more than offsetting the benefit of the 5%+ dividend yield. Subscriber losses continue. The Time Warner Inc (NYSE:TWX) merger is up in the air.
AT&T has a huge debt load to service even before adding Time Warner, a key reason why dividend growth is slowing.
From here, the bounce to $39 looks like an opportunity to escape AT&T stock, not wait for more upside. The meager performance of AT&T stock this year, and its underperformance for most of this decade, isn’t a sign of the market not paying attention.
Rather, it shows that the market understands the challenges facing AT&T going forward. The news surrounding AT&T might be more positive today than it was six weeks ago. But the rise in the T stock price incorporates most, if not all, of that good news.
Good News For AT&T Stock
I’ve been bearish on AT&T stock for some time, but even I’ll admit that the past month and a half has been positive for AT&T. In early November, Sprint Corp (NYSE:S) and T-Mobile US Inc (NASDAQ:TMUS) called off merger talks.
But that may not be the case. Sprint, who helped kick off the price wars (both directly and through offerings such as unlimited data), now is raising pricing, however modestly.
With that company now forced to focus on cash flow instead of just buying subscribers to make it more attractive in a merger scenario, what I’ve called the “circular firing squad” in the industry may come to an end.
This month, the FCC ended so-called “net neutrality.” On this site, Dana Blankenhorn made the case for the change being a good thing for AT&T. James Brumley highlighted the potential of the company’s AirGig technology, which can deliver broadband over power lines.
And to top it all off, AT&T raised its dividend for the 34th consecutive year. I had highlighted T stock as one of 10 high-yielders that wouldn’t cut its dividend next year; but with the increased debt load, a hike wasn’t necessarily guaranteed.
Income investors, however, have a higher payout to look forward to, with the AT&T stock annual dividend moving to $2.00 next year.
But the T Stock Price Has Gained
All told, the nearly 20% bounce in T stock off November lows makes some sense. At the same time, however, looking for a further rally seems overly optimistic.
Most importantly, while the news for AT&T is better, it’s not necessarily good. Pricing is going to remain intensely competitive across the board, even with a more rational Sprint.
Both the benefits of net neutrality and some help from corporate tax reform (including bonus depreciation changes) could be ‘competed out’, with at least of the portion of the savings simply being redirected to either pricing or better offerings.
And as for the T dividend, it grew 2% this year, and longer-term growth has been muted. AT&T simply has raised the dividend a penny a year for the last decade, an average hike of 2.3% that is well below most large-cap peers. Verizon’s dividend growth hasn’t been spectacular, either, but its average increase has been nearly 3% over the same period.
Meanwhile, the T stock price has gained 20%, which incorporates much of the good news. There’s a case that T stock can get to or modestly past $40, at which level its dividend yield would return to the 5% that has held for most of the past five years. Forward P/E would be in the 13-14x range – which, too, is about in line with historical ranges, and makes sense given meager earnings growth.
Recent events simply don’t change the investment case here all that much. Net subscriber counts still are declining. The battle for wireless subscribers will remain intense, given that the market is saturated. AT&T’s debt load is enormous even before Time Warner. And dividend growth is meager.
It’s just not a compelling case, even if it is better than it was a month ago. But with the T stock price keeping pace with AT&T news, it’s hard to get too excited at $39.
As of this writing, Vince Martin has no positions in any securities mentioned.